Robb Company produces remote car starters for cars and sells them to automotive manufacturers for $100...
- Robb Company produces remote car starters for cars and sells them to automotive manufacturers for $100 each. Full capacity is 20,000 systems per month, but it is currently producing 18,000 systems per month for its regular customers. Robb’s manager, Ro Watts, receives a call regarding a one-time special order: Redd Automotive needs 2,000 systems and will pay $65 per system. Robb will incur no selling costs for the special order. Robb reports the following monthly results:
|
Total |
|
|
Revenue |
$1,800,000 |
|
Direct Materials |
450,000 |
|
Direct Labor |
180,000 |
|
Variable Overhead |
396,000 |
|
Fixed Overhead |
54,000 |
|
Variable Selling Expenses |
342,000 |
|
Fixed Selling Expenses |
36,000 |
Required:
- Should Robb accept this one-time special order?
- Redd’s manager calls again: They’ve run some new calculations, and they really need X systems at the same $65 price. It will have to be an all-or-nothing deal. This order will displace some of the volume sold to regular customers who are a lot more profitable. Assuming that Robb’s regular customer relationships will not suffer due to a small one-time volume reduction, and based on financial considerations alone, what is the maximum value of X?
Homework Answers
1. In the first situation, there is no loss of regular orders. Therefore, there is no opportunity cost involved.
| Reject Special Order | Accept Special Order | Increase ( decrease ) in Net Operating Income | |
| Revenue ( 2,000 * $ 65) | $ 0 | $ 130,000 | $ 130,000 |
| Less: Avoidable costs | |||
| Direct materials( $ 450,000 / 18,000 * 2,000) | 0 | 50,000 | (50,000) |
| Direct labor ( $ 180,000 / 18,000 * 2,000) | 0 | 20,000 | (20,000) |
| Variable Overhead ( $ 396,000 / 18,000 * 2,000) | 0 | 44,000 | (44,000) |
| Totals | $ 0 | $ 16,000 | $ 16,000 |
As acceptance of the special order leads to increase in net operating income by $ 16,000, the special order should be accepted.
Fixed overhead and fixed selling expenses are not relevant, as they would remain unchanged regardless of the decision to accept or reject the special order.
2. If acceptance of the special order results in loss of regular orders, there is opportunity cost involved.
Contribution margin per regular order = $ 100 - $ 76 = $ 24.
Therefore, minimum price to be quoted for special order = Variable Cost per Unit + Contribution Margin lost per unit of regular order = $ 57 + $ 24 = $ 81
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The company currently has the capacity to produce 90,000
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Direct labor
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